This was aptly illustrated when the Dow Jones Industrial Average and Nasdaq tumbled nearly 700 points and 317 points respectively last Friday in response to good news on the US economy, revealing rising job openings and a drop in unemployment.
US payrolls grew by 256,000 in December, while economists polled by Dow Jones expected an increase of only 155,000. The unemployment rate, projected to remain at 4.2%, fell to 4.1% during the month.
US stock markets are likely to fall further when it opens later today with the equities futures market in the negative.
The sea of red extended to Asian markets today with major stock indices in the region posting significant drops.
Hong Kong’s Hang Seng Index fell 190 points or 1%, falling below 19,000 for the first time since last September. Taiwan’s Taiex tumbled 523 points (2.28%), India’s Nifty 50 fell 323 points (1.38%), South Korea’s Kospi declined 26 points (1.04%), and Australia’s S&P/ASX 200 fell 102 points (1.23%).
Back home, the benchmark FBM KLCI fell 16.82 points, or 1.05%, to 1,585.59 points.
In Europe, the UK, French and German markets also fell while the Japanese stock market was closed for a holiday.
Analysts have sought to explain the peculiar logic between good economic news and adverse stock market reactions.
Seema Shah, chief global strategist at Principal Asset Management, said the strong jobs report will be good news for the US economy and the US dollar, but “unwelcome news for equities”.
Rising inflation spooks investors
UOB Kay Hian Wealth Advisors head of investment research Sedek Jantan noted that last Friday’s non-farm payroll report and a declining unemployment rate signal a strengthening US economy.
“While these are positive signs for economic fundamentals, they also raise concerns about inflation, potentially making a rate cut less likely,” he told Bernama.
He added this has created uncertainty and impacted global markets, contributing to the FBM KLCI’s negative performance today.
Essentially, a booming US economy feeds investors’ fears that the Federal Reserve (Fed) could reverse course on lowering interest rates after hiking rates to cool surging inflation following the Covid-19 pandemic.
Low interest rates are seen as highly positive for risk assets such as stocks and cryptocurrencies. The US central bank typically lowers interest rates to stimulate the economy and raises them to slow it.
Investors were also spooked last Friday by fresh inflation fears when the University of Michigan’s consumer sentiment index signalled consumers’ rising concern on the inflation front.
Traders are giving 97% odds that the Fed maintains interest rates at its meeting later in January, and they now think it will hold rates where they are in the March meeting as well, based on fed funds futures trading.
The Fed cut its benchmark rate by 0.25% in December.